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GroupWatson First Time Home Buyers Guide
Buying a home can be an overwhelming process for even the most experienced shoppers. For a new home buyer shopping for the very first time, the unknowns can be paralyzing at times. After all, it is a BIG purchase! Rest assured, GroupWatson has several Buyer Specialist Realtors that are here to help every step of the way! For those who have never purchased a home, or if it’s been several years, we’ve put together a step-by-step guide to help eliminate some of the mystery and ensure that each decision is made with confidence.
The very first step when considering a home purchase is to know your financial status. Go through your budget and determine what you’re comfortable spending each month for housing, including utilities, insurance, and maintenance. Review your savings as well, because you will need funds for a down payment, inspections, appraisal, and closing costs, and should keep some in savings for deductibles, maintenance, and repairs. Water utility expenses can often be found online or by calling the city utility department in the area you’re looking at. Online calculators are available to estimate energy cost expenses or ask us for our office utility concierge to get an idea. Once you begin looking at homes, average utility costs can be requested from the sellers of each prospective home. Internet, phone, and television provider costs will vary by area and plan as well. As a rule of thumb, many financial experts recommend spending under 40% of your total income on housing costs, including utilities and maintenance.
Once you’ve done some legwork on your budget, contact a mortgage loan officer to begin the pre-approval process (your preferred Realtor can recommend some trustworthy loan officers). Pre-approval ensures that you are eligible to buy a home, confirms the price you can realistically afford, and proves to sellers that you’re a solid buyer when you’re ready to make an offer on a home. The loan officer will do a credit check, verify your income and assets, and recommend the best loan type for your situation and goals. They will also give you an estimated monthly mortgage payment for the qualified loan amount and a break-down of the fees you can expect to pay at closing. These fees will include loan origination charges, property taxes, closing and title company fees, etc. You can plan on roughly 3% of the purchase price for closing costs. When shopping for mortgages, multiple credit checks for home loans within a 45-day period are counted as just 1 inquiry, so you may shop around for the best rate without penalty. If the monthly payment for the amount you qualify to spend is higher than you’re comfortable paying, that’s OK. Let your lender know what your comfort level is, and they will recommend a purchase price to meet that goal. If by chance you’re not able to qualify yet, loan officers can help advise you on improving your credit. Sometimes a couple of months of strategic payments are all that’s needed.
Set aside funds for your purchase process. When you’re ready to purchase, be prepared to pay, on average, 1% of the purchase price of the home as an Earnest Money deposit, anywhere from $100-$250, on average, for the Option Money Fee, $350 to $800 for inspections, and about $400 to $600 for an appraisal. The Earnest Money is will be held by the title company until closing as collateral. As long as you comply with the terms of the contract, this money is then applied toward closing costs. You only risk losing this deposit if you default on the contract, or back out after allowable deadlines have passed. The Option Money is paid directly to the seller, for the option period. The option period is used for inspections and further investigation, and in Texas, the buyer has the right or “option” to terminate the contract for any reason, or no reason at all, and receive their earnest money deposit back. If the option is used, the buyer will forfeit the option fee to the seller, to compensate them for the inconvenience of taking the home off of the market. If it is not used and the contract proceeds to closing, the option fee can be credited toward closing costs as well, depending on what is marked in the contract. Once in contract, you may choose any inspector you wish, and each will set their own rates. Plan on $400 to $500 for a typical house, and additional fees if the house is larger than 3,000-4,000 square feet, or to inspect a pool, septic system, or any other added equipment that needs to be inspected. Add about $100 for termite inspections, which are required for certain loan types and strongly recommended for all others. Appraisal fees for a typical house are $350 to $500 and may be more for homes on acreage or that are significantly larger. The appraisal fee may be paid to your lender’s bank, an Appraisal Management Company (often called AMC), or may be postponed until closing, depending on the lender. There are even a few mortgage lenders that don’t charge an appraisal fee at all.
Research the areas you’re considering. (You can do this in conjunction with steps 1 and 2 but avoid touring homes until you’re pre-approved so that you don’t fall in love with something before you’re ready.) Test commute times and traffic around your work hours. Drive through different neighborhoods during the day and night to see how much activity there is. Read up on school districts (even if you don’t have children, school ratings can have a strong impact on resale values), decide whether you want a single detached house, condo, town home, etc. Determine how much space you’ll need. If you’ve never owned a home before, it may be hard to gauge how many square feet you need, so start with the basics- minimum number of bedrooms, bathrooms, and garage spaces. Casually browse online listings for different areas to get a feel for what prices are like in different neighborhoods. Generally, the larger the home, the higher the price. Same with condition- well kept homes and homes with modern upgrades will usually sell for more than homes needing repair or updating.
Next, consult with your trusted Realtor. In Texas, buyer’s agents are typically paid a split of the listing fee as a “finder’s fee” when a home is sold. Therefore, their services come at no out of pocket cost to you as a home buyer, in most cases. Sit down and discuss the locations you like along with your needs, wants, and plans for your new home. This consultation should also go over the basic steps in the process, offer strategies based on local market conditions at the time, and communication preferences. Discuss long term plans- like do you plan to live in this home for 5 years and then upgrade, or will this be more of a long-term home? How much time and money do you intend to devote to maintenance? Are you willing to do cosmetic updating, or do you prefer something “turn-key” that you can move right into? All of this information will help your agent set up an MLS search and start looking for homes that may be a good fit. It’s not uncommon for a first-time home buyer to need to see a few homes to get a true feel for what you’d like to live in.
Let the house hunting begin! After you’re pre-approved and have met with your Realtor for an initial consultation, it’s time to start touring homes. This can be equally exciting and daunting as you begin to realize that popular TV shows simplify a more in-depth process. The MLS search your agent set up will be the most up-to-date source for listings. Third-party sites feed listings from the MLS and may show a few additional options listed by the owners themselves, but most don’t update regularly so they’ll continue to display listings that are under contract or sold, and can sometimes fall victim to scam listings, entered by users as an attempt to collect personal data or money. These scams are most common with rental listings, but sites that allow “for sale by owner” listings to be input by the general public are all vulnerable. Tell your agent about any listings you’re interested in that appear on these sites but not on your MLS search so that they can look them up. To protect yourself, never fill out an application with personally identifying information or pay a fee to a stranger in order to see a house for sale! Keep an open line of communication- you and your agent are working as a team toward the same goal. If you’re wanting to attend an open house or builder model, no need to hide that information from your agent. You’re not bothering your agent by asking to see something, either. Their job is to help you find the home that best suits your needs. If they’ve got appointments lined up already, your agent can always advise you on what to say and what to keep to yourself so that you don’t play all of your cards before any negotiations!
Keep an open mind and be realistic. As a first-time home buyer, it’s unlikely that your budget qualifies you to buy a luxury mansion. Few homes will be “perfect” the way they are, but many will have the potential to work well. In other words, you may have to sacrifice some of your wants to ensure that all your needs are met. If a house is in the right location and has the layout you need, don’t cross it off your list because of the ugly paint or carpet. Cosmetic changes cost very little when compared to the price of a house and can be done over time to make the home suit your style. You may find that home improvement is a new hobby that you never knew you’d love!
Offer up! Once you’ve found a home that’s a good fit- the right location, good layout, and a reasonable price, it’s time to make an offer. Your agent will work with you to prepare an offer contract including the price you’re willing to pay for the home, a closing date, and other terms of the sale. They’ll discuss your obligations and rights under the contract and help put you in the best position for negotiations in the current market conditions. The offer will be submitted along with your pre-approval letter from your lender. Your agent will send the offer to the seller’s agent, and the seller’s agent will review it with the owner or owners. Be patient! It can take a day or 2 to receive a response, depending on their situation. Keep in mind that some home owners may live outside of the area, may work odd hours (like a nurse or pilot), etc., and if the owner is an estate- there may be several people making the decision. Even in today’s technology-driven world, not everyone is able to respond to a phone call or email right away. The owner has 4 options- accept the offer as it’s written, reject the offer, or make a counter offer with a price & terms more favorable to their needs. The 4th option is to not respond at all. This is rare, and quite rude, but be aware that it is a seller’s right. Counter offers are most common, and it is not unusual for buyers and sellers to counter back and forth a few times before coming to a complete agreement. In a more competitive market, a seller might have multiple offers to review and choose from.
Acceptance and execution. Once an offer is accepted by the seller(s) and everyone has signed the final version of the contract, the contract will be “executed.” This means that the deadlines in the contract will begin, and the executed date near the end of the contract will count as day “0.” Time is of the essence, so you and your agent will need to begin your due diligence on inspections. Earnest money and option money must be delivered within the first 3 days of the contract period, so your agent will need to collect this upon execution of the contract. Your agent will deliver the contract and earnest money to the title company, who will begin their portion of the contract work and hold the earnest money. The title company will introduce themselves to you and may ask for information along the way. For the most part, the work they do will be behind the scenes, however.
Inspections and repair negotiations. During the option period, home buyers should have the home thoroughly inspected. Inspectors are licensed by the state, just like real estate agents, and will test each major system inside and outside of the home. Their report will note any signs of potential condition issues or repairs so that you know exactly what you’re getting into. A house cannot “pass” or “fail” a home inspection, and the inspector is not allowed to tell you whether or not they think the house is worth what you are paying for it. They can simply report on the condition and help you determine when further investigation is needed. If problems are found with a major system, like electrical, plumbing, or HVAC for example, you may want to call in a licensed repair person for that system for estimates. Once you know what needs work, you and your agent can prepare a repair request or ask for a credit, or a combination of both. The seller can respond by accepting, rejecting, or countering, just like with an offer, and negotiations may go back and forth quite a bit. Knowing the condition of the home, the cost of repairs, and how much the seller is willing to do can help you make a well-informed decision as to whether you’d like to proceed with the purchase or back out and cut your losses. Never skip an inspection, even on a brand-new house! Home builders can and do make mistakes, so it’s important to verify that everything is working as it should before closing.
Appraisal and loan underwriting. After inspections, the loan officer will order an appraisal. An appraisal is performed by a third-party appraiser, licensed with the state. They will measure the rooms in the home to verify the square footage, take photos of the home’s features, document the condition of the home, and then compile a report comparing the home with other similar homes that have recently sold in the area to come up with the appraiser’s educated opinion of value. Depending on the loan type, they may also note repairs required to ensure that the home is in “live able” condition. This report is then returned to the loan officer and reviewed by the loan underwriter to confirm that the value meets their requirements for the financing. Some loans will require that the home’s value be equal to or greater than the purchase price, others may require it to equal or exceed the loan amount. Your loan officer will contact you and your agent if there are any concerns about the value or condition. If there are concerns, the price and/or repairs may need to be renegotiated one more time. Once the appraisal report is in and approved, the entire loan package will be submitted to the underwriting department at the bank. Be sure to submit any documents requested by your loan officer as soon as possible to prevent any delays in this process. Underwriters will review the contract, loan application and supporting documents, and the appraisal report to ensure that it meets their final approval criteria. Sometimes this process can feel a little invasive, as they may request explanation letters or further documentation of income, employment, or any minor credit blemishes. Rest assured that this is a normal part of the process, and banks do this to reduce their risk level. After all, loaning out hundreds of thousands of dollars is a pretty big risk! They want to make sure that you’re likely to be able to repay the loan.
Utilities and insurance. Your agent will help you determine when to transfer utilities, but this should be done usually at least 3 days before closing, when possible. Some utility providers will require proof of ownership, so you will need to bring in the requested documents after closing. Your agent will help communicate with the seller’s agent in this instance to help the transfer go smoothly and avoid interruption of service, when possible. You’ll also need to shop for and select a homeowner’s insurance policy to cover the home and your belongings. Your agent can recommend some great insurance providers, but you may use any insurer that you’d like. Often if you have your home and auto policies with the same provider, you can receive a multi-policy discount so you might consider requesting quotes for both the house and your vehicles. Proof of insurance is usually required by your bank prior to closing, so be sure to send a copy to your loan officer, or have your insurance agent reach out to assist in providing the necessary documentation.
Clear to close. These three words are quite celebrated in the real estate & mortgage world! Once the underwriting department has reviewed your loan file and all requested documents have been submitted and approved, they’ll note the file as clear to close. This means that everything is completely approved and you’re days away from closing. Current laws require a 3-day waiting period after you’ve signed the approved disclosures- which will show the total amount you’ll need to bring to closing and are usually sent right about the same time as the file is cleared to close. From there, the closing documents are prepared. After the 3-day period, and when all documents are ready, you’ll deliver your closing costs and down payment funds (either via wire transfer or cashier’s check) and then you’ll sign a stack of documents in the title company office. It is important to remember that wire fraud is unfortunately a thing, so be sure to verify any wiring instructions you receive via email by calling the title company prior to sending a penny. In the past, scammers have hacked into the email accounts of agents or title companies and sent fraudulent account information. Your agent will never ask for money to be wired anywhere, only the title company will.
Possession. Depending upon what’s in your contract, you’ll either take possession after closing, or at the end of a temporary lease. If possession was agreed upon at “closing and funding,” you will receive keys after everyone has signed their documents and when the bank has wired the loan money to the title company. This usually happens a couple of hours after everyone has signed (all sellers and buyers), sometimes even the next business day. This is because after everyone has signed, the documents are scanned or faxed to the lender for final review and approval. As long as everything is signed and notarized as required, the bank will then send the funds. If any party signs late in the business day, the banks may close before the file can be reviewed or funds can be wired. For planning purposes, don’t schedule your cable installation immediately after signing your closing documents. If you have a temporary lease, your contract will determine when you’re due to receive the house, unless the sellers move out early and agree to hand the keys over early. Your agent will stay in touch with the owner’s agent to co-ordinate the transfer either way.
Enjoy your home and stay in touch! After moving in and getting settled, your agent can still help you out! By this time, you’ve spent a great deal of time together and may have even become friends. Your agent will check in on you from time to time and would love to see what you’ve done with the home as far as decorating and furnishing. GroupWatson Realtors love to stay in touch with our clients. We are here to help with advice on home improvements, adding value, tax exemption applications, and county appraisal protests. And of course, if you have friends or family looking for a home, we are happy to help them as well. Referring others is the best compliment a happy home buyer can give their agent. It shows that we have earned your trust and demonstrated our expertise well.
We hope this thorough guide helps you to better understand the process and see that there’s nothing to fear. We are here to help!
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Lauren is a lifetime North Texas resident and graduate from Texas Woman's University. She currently lives in Prosper and has been working in and around her community for the past six years, resulting ....